Notes to Combined Financial Statements

1. Nature of Organization

American Foundation for the Blind, Inc. ("AFB") is a not-for-profit-corporation founded in 1921 and is exempt from federal taxes under Sections 501(c)(3) and 509(a)(1) of the Internal Revenue Code. AFB serves people who are blind or visually impaired, other organizations and professionals in the blindness field, and the general public.

The program service functions, which constitute the principal activities of the Foundation, are:

Information Development, Collection, and Dissemination,

Issue Identification, Analysis, and Problem Solving,

Public Education and Advocacy,

Production, Sale, and Distribution of Audio Material.

AFB Special Fund, Inc. ("AFB Special Fund") is a not-for-profit corporation founded in 1989 and is exempt from federal taxes under Section 501(c)(3) of the Internal Revenue Code. AFB Special Fund is a supporting organization and under the direct operational and management control of AFB.

The primary assets of AFB Special Fund consist of 1,814 shares of stock, representing an aggregate 86.71% interest in Courtney Company ("Courtney"). These shares of stock were transferred to AFB Special Fund as the residuary beneficiary of two trusts, one of which was created under provisions of a will that establishes restrictions on the use of the proceeds. The asset value of AFB Special Fund's interest in Courtney was assigned to land and mineral rights. Due to the majority ownership, Courtney is consolidated in these combined financial statements.

Effective August 31, 2005, AFB terminated its September 1999 agreement with Talking Book Publishers, Inc. ("TBPI"), a not-for-profit corporation founded in 1975 and exempt from federal taxes under Section 501(c)(3) of the Internal Revenue Code, such that, effective September 1, 2005, TBPI reverted to being an independent public charity and was no longer a supporting organization to AFB. Due to management control that was in effect at the time, TBPI financial activity for the year ended June 30, 2005 and for the two-month period ended August 31, 2005 is combined in the combined statements of financial activities and changes in net assets. TBPI accounts are only combined in the combined statements of financial position at June 30, 2005.

2. Summary of Significant Accounting Policies

The following is a summary of significant accounting policies used in the preparation of the combined financial statements:

Combined Financial Statements

The combined financial statements include the accounts of AFB and AFB Special Fund, which includes the majority ownership interest in Courtney, less the minority owners' share therein. The combined statements of financial activities include TBPI accounts for the year ended June 30, 2005 and for the two-month period ended August 31, 2005. The combined statements of financial position also include TBPI accounts at June 30, 2005 only. All significant interfund balances and transactions are eliminated in combination. Collectively, these entities are referred to as the "Foundation."

Summarized Comparative Information

The financial statements include certain prior-year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the Foundation's financial statements for the year ended June 30, 2005, from which the summarized information was derived.

Net Asset Classifications

The Foundation reports information regarding its financial position and activities according to three net asset classifications: unrestricted, temporarily restricted, and permanently restricted.

Unrestricted net assets are not restricted by donors, or the donor imposed restrictions have expired. The unrestricted net assets include all funds over which the Board of Trustees (the "Board") has full discretion as to use. The Board has designated a portion of the unrestricted net assets for investment in land, property and equipment. This net asset grouping includes the Helen Keller Fund, which was established by the Board in 1924 to ensure that the work of the Foundation would be protected from fluctuating economic conditions.

Temporarily restricted net assets include funds that are subject to time or purpose restrictions designated by the donor or grantor which cannot be changed by the Board. When the time or purpose restriction is satisfied, the temporarily restricted net assets are reclassified as unrestricted net assets and reported in the combined statements of activities as net assets released from restrictions.

Permanently restricted net assets include endowment funds established by donors. The permanently restricted net assets balance reflects the principal amounts of these endowments. Income generated by the endowment funds may be subject to time or purpose restrictions designated by the donor or available for use by the Foundation at the discretion of the Board. Depending upon the donor's designation, such income is reflected in the statements of activities as either temporarily restricted or unrestricted income.

Cash and Cash Equivalents

Cash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less.

Investments

Investments are recorded at fair value based on published net asset values or net asset values as determined by the investment manager or general partner. Interest and dividends are recorded on the accrual basis. Investment transactions are recorded at the trade date using the weighted average cost method. Realized gains or losses from investment transactions are recorded upon the sale or maturity of the related securities and are reflected in the combined statements of activities.

Land and Mineral Rights

Land and mineral rights were recorded at fair value at the date of contribution. Amortization is calculated on a straight-line basis over 30 years, representing the term of the lease between Courtney and a mining company, including renewal periods.

Inventories

Inventories consist of publications and talking books, and are stated at the lower of cost or market. Cost is determined on the weighted average basis.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation is provided on the straight-line method based on the estimated useful lives of the various assets, which range from three to forty years. Leasehold improvements are amortized over the shorter of the life of the lease or the improvement. Expenditures which significantly improve or extend the life of an asset are capitalized. Repairs and maintenance costs which do not extend the useful lives of the assets are expensed as incurred. Upon retirement or disposal, the asset cost and related accumulated depreciation and amortization are eliminated from the respective accounts, and the resulting gain or loss is included in the changes in net assets for the period.

Contributions, Legacies and Bequests

Contributions, legacies and bequests are recognized as revenue at the date received and are considered to be available for unrestricted use unless specifically restricted by the contributor. Non-cash legacies and bequests are recorded at fair value at the date of beneficial ownership. Long-term unconditional promises to give are recorded as contributions at the net present value
of the amounts expected to be collected. The discounts on these amounts are computed using risk-free interest rates applied to expected cash flows after any allowance for doubtful accounts applicable to the years in which the promises are received.

Related Party Transactions

Some of the Foundation's contributions are received from related parties including members of the Board of Trustees. No contributed goods or services were received from related parties in fiscal 2006 and 2005.

Grants from Government Agencies

Grants from government agencies are conditioned upon the Foundation incurring certain qualifying costs and are recognized as revenue as those costs are incurred.

Contributed Property and Services

Contributed property and services are recognized as revenue and expense if such property and services meet the criteria for recognition as stated in Statement of Financial Accounting Standards ("SFAS") No. 116, Accounting for Contributions Received and Contributions Made. Contributed property and equipment are recorded at fair value at the date of donation.

Collection Items

Collection items, acquired through contributions from the Estate of Helen Keller, consisting of memorabilia and personal writings, are not capitalized on the combined statement of financial position, based upon the conditions as stated in SFAS No. 116.

Sales

Sales of Talking Books and publications are recognized at the time materials are shipped to the customer and when risk of loss and title transfer. Returns of publications are accepted for three months after sale. A reserve for returns of $8 has been recognized as of June 30, 2006 and 2005.

Expenses

Expenses are reported on a functional basis with all expenses charged either to a particular program or supporting service. Overhead expenses including occupancy, telephone and insurance are allocated to functional areas based upon space used or actual usage if specifically identifiable. The allocations of salary and related expenses for management and supervision of program service functions are made by management based on the estimated time spent by executives on the various program service functions.

Advertising Costs

All costs relating to the marketing and advertising of the Foundation's services are expensed as incurred. Total advertising expenses for the years ended June 30, 2006 and 2005 were $19 and $22, respectively.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Risks and Uncertainties

The Foundation attempts to diversify its investment portfolio. Investment securities are exposed to various risks, such as interest rate, market, and credit. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in value of investment securities, it is at least possible that changes in risks in the near term could materially affect investment balances as reported in the combined statements of financial position and the combined statements of activities.

Impairment of Long-Lived Assets

Long-lived assets, consisting of property, plant, equipment and land and mineral rights, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Impairment loss on assets to be sold, if any, is based on the estimated proceeds to be received, less estimated costs to sell. No impairment losses were recognized for the years ended June 30, 2006 and 2005.

3. AFB Special Fund

AFB Special Fund recorded approximately $1,705 and $2,176 of income, net of operating expenses and income taxes before minority interest relating to the operations of Courtney for the years ended June 30, 2006 and 2005, respectively. Such amounts are recorded in royalty and other income in the combined statement of activities. Royalties and other income received from Courtney operations are contingent upon maintaining land lease agreements and such revenues may fluctuate accordingly. The summarized result of the operations of Courtney follows.

Condensed Statements of Activities

(in thousands of dollars)

2006

2005

Revenues

$ 2,909

$ 3,654

Operating expenses, including income taxes of $869 and
$1,104 in 2006 and 2005, respectively

(1,100)

(1,369)

Income before amortization and administrative expenses

1,809

2,285

Amortization incurred by AFB Special Fund

(87)

(87)

Administrative expenses incurred by AFB Special Fund

(17)

(22)

Net income

$ 1,705

$ 2,176

Minority interest in the combined statements of financial position at June 30, 2006 and 2005 consists of the minority owners' share of the net assets of Courtney as of such dates and includes the minority owners' share of income before amortization and administrative expenses, less the minority owners' share of dividends.

4. Investments

At June 30, investments are composed of the following:

(in thousands of dollars)

2006

2005

Cost

Market

Cost

Market

Limited partnership

$ 1,003

$ 1,392

$ 1,004

$ 1,221

Mutual funds

31,829

34,832

27,711

29,825

Equities

223

318

223

262

Corporate and municipal bonds

1,015

1,016

963

973

U.S. Government obligations

211

204

222

224

Pooled Income Fund

22

21

31

22

Investment in REIT

426

426

426

426

Investment in trust

65

65

—

—

Certificates of deposit/money market

157

157

106

106

$ 34,951

$ 38,431

$ 30,686

$ 33,059

The Foundation sold a parcel of land held in trust and recorded a gain of $743 for the period ended June 30, 2005.

The Foundation has received pooled income fund contributions. Under the terms of the pooled income fund agreements, the donor's designated beneficiary receives the income earned on the pooled income fund until death, at which time the value of the related pooled income fund reverts to the Foundation to be used as designated by the donor. The Foundation recorded its remainder interest in the assets received as temporarily restricted contribution revenue, measured at the fair value of assets received and discounted based on the life expectancy of the donor's designated beneficiary on the date of contribution. The discount rates used in calculating the present value of the assets received ranged from 5.4% to 5.6%.

In fiscal 2006 and 2005, the Foundation recorded no additional pooled income fund contributions. Deferred revenue related to the pooled income fund contributions amounted to approximately $18 at June 30, 2006 and 2005.

5. Unconditional Promise to Give

Included in receivables are the following unconditional promises to give at June 30:

(in thousands of dollars)

2006

2005

Amount due in

Less than one year

$ 70

$ 60

One to five years

190

301

Gross pledges receivable

260

361

Less, unamortized discount

(9)

(16)

Less, allowance for doubtful pledges

(8)

(3)

$ 243

$ 342

The discount rate used during fiscal years 2006 and 2005 was 1.8%.

6. Property, Plant and Equipment

At June 30, property, plant and equipment are composed of the following:

(in thousands of dollars)

Estimated
Useful Lives
(Years)

2006

2005

Web site development

3

$ 903

$ 619

Building

40

976

943

Equipment

5

2,930

2,999

Leasehold improvements

Shorter of lease
Term or useful life

4,078

4,126

Leased equipment under capital leases

127

127

Total cost

9,014

8,814

Less: Accumulated depreciation and amortization

6,030

5,608

Net

$ 2,984

$ 3,206

Depreciation and amortization expense for the years ended June 30, 2006 and 2005 was approximately $741 and $773, respectively.

7. Revolving Credit Facility

In February 2005, the Foundation extended a revolving credit facility (the "Revolver") to $600 with a financial institution. The availability of the revolver was contingent on the Foundation maintaining certain unencumbered liquid assets as well as certain non-financial covenants. The Revolver accrued interest at monthly LIBOR plus 1.65%. In February 2006 the credit line expired and the remaining balance was paid. The interest rate as of June 30, 2005 was 5%.

8. Charitable Gift Annuity

The Foundation has entered into charitable gift annuity agreements whereby the donors contributed assets to the Foundation and the Foundation promised to pay a fixed amount during the lifetime of the donor.

The contributed assets were recorded at the contribution date at fair value and the related annuity payment liabilities were recorded at the present value of the future cash flows expected to be paid to the donor. The discount rates used in calculating the present value of the annuity payment liabilities ranged from 3.8% to 7.4%.

During the years ended June 30, 2006 and 2005, the Foundation entered into additional charitable gift annuity agreements of approximately $76 and $5, respectively.

Charitable gift annuity liabilities were approximately $95 and $94 at June 30, 2006 and 2005, respectively, which is included within the deferred revenue line item in the combined statements of financial position.

9. Retirement and Benefit Plans

Defined Contribution Pension Plan

The Foundation is the sponsor and administrator of a defined contribution pension plan (the "Plan"). All employees of the Foundation are eligible to participate in the Plan on the Plan entry date immediately following the completion of one year of service.

Contributions to the Plan range from 2.5% to 10% and 2.5% to 5% for the Foundation and the participants, respectively, based upon the participant's age. Contributions are invested in one or more of the funding vehicles available to the participants from Teachers Insurance and Annuity Association or College Retirement Equities Fund. The participants are fully vested in all contributions made to the Plan. Contributions by the Foundation to the Plan for the years ended June 30, 2006 and 2005 amounted to approximately $404 and $355, respectively.

Postretirement Benefits Other Than Pensions

The Foundation sponsors defined benefit postretirement health and prescription drug benefit plans for certain employees. The plans cover a percentage of costs of continued health insurance coverage for employees who were hired prior to July 1, 1993 and retire on or after age 65 with at least 15 years of service. Effective January 1, 2006, the Foundation has eliminated prescription drug coverage for grandfathered retirees. The impact of this change was to decrease the benefit obligation by $24.

(in thousands of dollars)

2006

2005

Benefit obligation at June 30

$(583)

$(644)

Fair value of plan assets at June 30

—

—

Funded status

$(583)

$(644)

Accrued benefit cost recognized in the combined
statement of financial position in accrued expenses

$ 692

$ 681

Weighted-average assumptions as of June 30

2006

2005

Discount rate

6.25%

5.00%

For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2005-2006 and graded down to 8% thereafter.

(in thousands of dollars)

2006

2005

Benefit cost

$ 45

$ 47

Employer contributions

$ 34

$ 37

Benefits paid

$ 34

$ 37

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one‑percentage‑point change in assumed health care cost trend rates would have the following effects:

(in thousands of dollars)

1% Increase

1% Decrease

Effect on total of service and interest cost components

$ 1

$ (1)

Effect on postretirement benefit obligation

$ 6

$ (6)

These assumptions are based upon the presumption that the plans will continue. Were they to terminate, different assumptions and other factors might be applicable.

(in thousands of dollars)

Estimated Future Benefit Payments are:

2005

$ 42

2006

43

2007

48

2008

52

2009

59

2010 - 2014

303

10. Temporarily and Permanently Restricted Net Assets

Temporarily restricted net assets are available for the following purposes at June 30:

(in thousands of dollars)

2006

2005

Information and research

$ 2,029

$ 1,708

Training and development

1,800

2,365

Public education

367

289

Pooled income fund

38

38

Various programs

5,573

5,278

$ 9,807

$ 9,678

The income and gains from permanently restricted net assets at June 30 are restricted to the following purposes:

(in thousands of dollars)

2006

2005

Information and research

$ 1,589

$ 1,589

Training and development

320

320

Migel Medal Program

25

25

Any activities of the Foundation

1,290

1,234

$ 3,224

$ 3,168

11. Net Assets Released From Restrictions

Net assets were released from donor restrictions by incurring expenses satisfying the applicable purpose or time restrictions.

The amounts released during the year ended June 30, 2006 are as follows:

(in thousands of dollars)

Purpose and time restrictions accomplished

Information development, collection, and dissemination

$ 995

Issue identification, analysis, and problem solving

1,316

Public education and advocacy

131

Production, sale, and distribution of audio material

18

Management and general

2

Resource development

11

$ 2,473

12. Lease Commitments

The Foundation's operating lease agreement for its current office premises at 11 Penn Plaza, New York, New York expires on September 30, 2009. This lease agreement includes scheduled rent increases over the term of the lease, which in accordance with accounting principles generally accepted in the United States of America are recognized on a straight-line basis over the term of the lease. Deferred rent of approximately $152 and $217 is included in accounts payable and accrued expenses on the Combined Statement of Financial Position as of June 30, 2006 and 2005, respectively. The Foundation also rents office facilities in Atlanta, Chicago, Dallas, District of Columbia, Huntington (West Virginia), and San Francisco under noncancellable operating leases with terms ranging from three to ten years. Rental expenses under operating leases were approximately $1,017 and $1,057 for the years ended June 30, 2006 and 2005, respectively. In addition, the Foundation maintains capital leases for equipment ranging from three to five years.

Future minimum payments under noncancellable operating and capital leases are as follows at June 30, 2006:

(in thousands of dollars)

Operating
Leases

Capital
Leases

Year ending June 30,

2007

$ 872

$ 40

2008

802

18

2009

735

4

2010

156

—

Minimum lease payments

$ 2,565

$ 62

Less amount representing imputed interest

12

Present value of minimum lease payments under capital
lease

$ 50

The Foundation receives rental income from its sublet premises at 11 Penn Plaza, New York, New York. The expected future receipts are as follows:

(in thousands of dollars)

Year ending June 30,

2007

$ 215

2008

218

2009

221

2010

72

Total expected receipts

$ 726

Report of Independent Auditors

To the Board of Trustees of
American Foundation for the Blind, Inc.:

In our opinion, the accompanying combined statement of financial position at June 30, 2006 and 2005 and the related combined statement of activities and changes in net assets for the year ended June 30, 2006 and the related combined statements of functional expenses and cash flows for the years ended June 30, 2006 and 2005 present fairly, in all material respects, the financial position of the American Foundation for the Blind, Inc. ("AFB") at June 30, 2006 and June 30, 2005 and the changes in their net assets for the year ended June 30, 2006 and their cash flows for the years ended June 30, 2006 and 2005. These financial statements are the responsibility of the AFB's management. Our responsibility is to express an opinion on these financial statements based on our audit. The prior year summarized comparative information on the combined statement of activities has been derived from AFB's 2005 financial statements, and in our report dated September 9, 2005, we expressed an unqualified opinion on those combined financial statements. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.